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Subprime Market

Subprime Market. Suvimon Jongsuebchoke (Ploy) BA 543 section 1 Spring 2013. Agenda. Types of residential mortgage Credit score Characteristics of subprime mortgage loan Subprime crisis. Types of Residential Mortgage. Prime Mortgages High credit quality 2/3 of the mortgage market

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Subprime Market

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  1. Subprime Market SuvimonJongsuebchoke (Ploy) BA 543 section 1 Spring 2013

  2. Agenda • Types of residential mortgage • Credit score • Characteristics of subprime mortgage loan • Subprime crisis

  3. Types of Residential Mortgage • Prime Mortgages • High credit quality • 2/3 of the mortgage market • 75 % of the loan have fix interest rate • Near-Prime (Alt-A) Mortgages • Good credit histories, but contain some risk factors • Subprime Mortgages • Provide to borrowers with impaired credit rating • Pay high interest rate • 50 % of the loan have adjustable interest rate

  4. 4 C’s of credit • Credit History • Capacity • Collateral • Conditions Credit scores : FICO scores ranges from 350-850 http://www.bankrate.com/calculators/credit-score-fico-calculator.aspx

  5. Characteristics of subprime mortgage loan • 100 percent loans (No down payment) • Closing cost on top • Interest only loans • No documentation loans • Adjustable Rate Mortgage (ARM)

  6. Example : Ploy wants to purchase the house that is worth $200,000. assume the closing cost = $5,000

  7. Example (cont.) http://www.interest.com/sem/mortgages/calculator/?popup=0&ec_id=m9003212&ef_id=Ex9QSBAuGfkAAE28%3A20130511011111%3As http://www.calcxml.com/calculators/adjustable-rate-mortgage-calculator?skn=#calcoutput

  8. LTV = 0.95 (198,170/208,600) LTV =1.025 (205,000/200,000) LTV = 1.10 (198,170/180,000)

  9. Causes of Subprime Crisis • An increase in high-risk loans • 11 % Increasing in subprime mortgages (1996-2006) • Securitization Practices • Tripled the amount of mortgage-backed securities (1997-2007) • Mortgage Fraud • Decreasing housing prices after 2005

  10. Who has been affected by the crisis? Mortgage • Financial • product Secondary market Primary market Mortgage lenders Market makers http://vimeo.com/3261363

  11. Effects of Subprime crisis • Collapse of subprime mortgage industry • Foreclosures are on the rise • 9 % from June to July 2007 and 36% in August • Impact on stock markets • Dow Joans fluctuation • S&P had cross to negative territory • Problems with Alt-A mortgages appear • Difficulty to refinance

  12. Responses to the crisis • Federal reserve and central banks • Lowered the target for the federal funds rate from5.25% to 2% • Economic stimulus • George W. Bush  signed into law a $168 billion economic stimulus package • Obama signed a $787 billion stimulus package in the American Recovery and Reinvestment Act 2009 • Bank solvency and capital replenishment • $700 billion in funding for the “Trouble Assets Relief program (TARP) • Bailouts and failures of financial firms 

  13. Next Subprime ? • Auto industry • $47.5 billion bank loan (Q1, 2012) • The auto industry sold 7.3 millions units in the first 6 months of 2012 • Student loans • $900 billions market • College education are inflating • The number of borrowers

  14. Takeaway • Characteristics of Subprime mortgage • Effects of Subprime mortgage crisis on the economy • $ 945 billion lost • “Hamburger crisis”

  15. Questions ?

  16. References • http://efinancedirectory.com/articles/What_You_Need_to_Know_About_Subprime_Mortgages.html • https://www.wellsfargo.com/downloads/pdf/smarter_credit/lender_tips.pdf • http://www.forensisgroup.com/resources-for-attorneys/three-causes-of-the-subprime-mortgage-crisis • http://www.washingtonpost.com/blogs/wonkblog/wp/2012/07/06/subprime-auto-lending-is-surging-is-that-a-problem/ • http://online.wsj.com/article/SB10001424127887323701904578273711404133732.html • https://en.wikipedia.org/wiki/Subprime_mortgage_crisis#Responses

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